A Property24 reader asks:
A Property24 reader asks how to go about paying her bond on the 15th of the month in split or extra payments and what difference it will really make.
I would like to know more on how to go about paying my bond on the 15th of the month? Does that mean I have to pay the full amount on the 15th and the 30th, or can I pay extra on the 15th and the full amount on the 30th? What difference will it really make?
Liz de Mink of De Mink Property Finance based in Cape Town, advises:
Many people see a home loan as a stone around their neck, weighing them down for decades. But with a few tweaks you can begin to lift some of that weight and even make your bond work for you!
Banks calculate interest based on the daily balance of the loan, so by splitting your repayments or paying extra you reduce the amount outstanding across a given period which in turn reduces the interest applicable. There are a few ways of doing this...
The Split:
If you split your repayments so that you pay half the amount two weeks early and the other half right on time, you will save on interest being calculated.
Example:
On a loan of R600 000 the monthly repayment (calculated at 8.5% over 20 years) will be R5 206.94.
By making a payment of R2 603.47 (half of the monthly instalment) on the 15th of the month, and the other R2 603.47 at the end of month, you save on the daily interest over the 15 days between payments while also reducing the outstanding capital and cutting the term of your loan.
You will still be paying exactly the same monthly amount, just split into two payments. On R600 000 at 8.5% you could cut a 20 year loan by almost two years and save R11 948.85 in interest.
This makes split payments one of the simplest and most effective ways to reduce the repayment term/interest payable on your loan.
The Fortnightly:
A variation on 'The Split' which is enormously effective at making your bond work for you is to commit to a fortnightly payment plan. Here, instead of splitting your bond instalment into two equal payments across a calendar month, you pay half of the monthly repayment amount every two weeks.
Using the figures from the previous example you would commit to a payment of R2 603.47 every two weeks. 'The Split' option results in 24 payments per year (2 payments a month x 12 months) whereas ‘The Fortnightly’ results in 26 payments per year (there are 52 weeks in a year. You are paying every two weeks.)
The two extra payments mean that you are effectively making a full month’s extra payment to your bond every year. As this extra contribution would be used exclusively to reduce the capital amount owing, you will significantly reduce the repayment term of the loan to 16.7 years and save R127 423 in interest!
The Extra Payment:
If you routinely have surplus funds in your bank account, the wisest move is to pay extra amounts into your bond account thus reducing interest payable as well as the repayment term.
Again using a loan amount of R600 000 at 8.5% over twenty years as an example:
If you pay an extra R1 000 into your bond account every month, over and above the required minimum repayment of R5 206.94, you will reduce the repayment term to just under 14 years and save a whopping R230 000 in interest.
The above examples will require more discipline and commitment than paying the one minimum required payment every month, but the rewards are enormous. Please remember that whatever plan you adopt it is essential that you ensure there are always sufficient funds in your bank account to cover the bond repayments.
If you think you have the self-discipline and the funds, approach your bank today to arrange a debit order and cut your bond down to size!
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